Kentucky Derby an investor’s dream that few live

Owning race horses is mostly ‘a losing man’s game’

Kentucky Derby favorite Bodemeister is led to the track with his exercise rider for early morning workouts at Churchill Downs in Louisville, Ky., this week.

CHICAGO (MarketWatch) — There’s something glamorous and even romantic about owning a race horse, particularly one with enough speed and stamina to make it to the Kentucky Derby.

But it’s a risky bet that you wouldn’t want to stake your retirement or much of anything else on — except maybe immeasurable merriment, race horse owners say.

“It’s a losing man’s game,” said Kevin Schultz, a New York-based broker who for 10 years managed an ad hoc partnership of Northwestern University alums that called itself Team Julep Stables.

Schultz and 10 friends started their Run-for-the-Roses fantasy after more than a decade of annual road trips to Churchill Downs for the Derby. They anted up $150,000, at $5,000 a share, in 2000 to get into the horse business.

“We decided since we were around Churchill Downs every year, we wanted to win the Derby, not just be bettors,” said Schultz, who last year marked his 25th trek to Louisville, Ky., in 26 years.

Are jockeys irrelevant?

(1:05)

Pia Catton asks several jockeys to justify their existence as they get ready to race in the Kentucky Derby.

The group shelled out more money over the years, took annual pilgrimages to Churchill and never made a cent of profit before collapsing in 2010. Schultz said the group went broke after a “bad streak” of good horses and lost dreams.

That’s usually how it goes for race-horse owners with Kentucky Derby dreams, no matter if they are school teachers, lawyers or multimillionaires. They want a piece of what’s been dubbed the “greatest two minutes in sports,” a tradition that has endured for 138 years.

When the mile-and-a-quarter race is run Saturday, only 20 horses will enter the starting gate. But hundreds of owners will be cheering them on thanks to a myriad of partnership structures. Those partnerships pervade horse racing; anyone can buy in for as little as $2,000 up to millions of dollars.

Like Team Julep, very few of them will ever see a return on their investment.

Partnership possibilities

“This is a very difficult business to make financial sense out of unless you really know what you’re doing and you have an excellent plan,” said Jerry Crawford, an attorney from Des Moines, Iowa, who also is the managing partner of Donegal Racing, a 220-strong partnership that he launched after nearly 40 years of “dabbling” in horse racing. He’s been one of the lucky ones: he’s operated in the black since Day One, he said.

There are partnerships like his, which is made up of mostly Des Moines-area family and friends who can grab a 10% stake for $90,000. And then there are significantly larger ownership groups like Team Valor International, which forms 12 to 15 limited-liability partnerships with people all over the world each season.

Team Valor requires investors to pony up as little as $6,000 to as much as $75,000 to $100,000 for partnerships stakes.

“The partnerships are big and have gotten larger over the last few years,” said Vince Gabbert, the chief operating officer of Keeneland Association, a top-ranked thoroughbred racetrack and auction house in Lexington, Ky. “As with anything successful, you’ve got more people who want to be a part of it.”

But there also are partnerships as small as retired Hollandale, Minn., teacher Rod Zimmerman’s two-man team that will see a horse run in this year’s races at Canterbury Downs, a track based in a far-flung Minneapolis suburb called Shakopee.

“You get just as good of a thrill out of seeing a horse win if you own half of it or all of it,” Zimmerman said.

That should be reassuring to anyone who wants just the tiniest piece of the action. But think of your investment, whether it’s $2,000 or $100,000, as Schultz described it: “ready-to-lose money,” or the amount you might take to a casino and be willing to part with..

Costs add up for everyday investors

It’s not just the purchase price of a horse that will set you back if you decide to invest. There are monthly maintenance costs such as feed and veterinary bills, race-entry fees, payments to jockeys and exercise riders and the cost of following your horse around the country in search of purse money.

An unraced one-year-old thoroughbred, called a yearling, will be valued based on its pedigree and physical appearance, what the industry calls conformation. There are yearling sales across the country, where you could pay anything from $5,000 to $40,000 or a whole lot more. Bodemeister, the morning-line favorite for this year’s Derby, was a $260,000 Keeneland yearling purchase in September 2010.

Reuters

Kentucky Derby hopeful Hansen gallops on the track with his exercise rider during early morning workout at Churchill Downs in Louisville, Ky., this week.

Financially then, being a race horse owner is more akin to owning a boat: there’s a big upfront cost of entry, the cost of using it, maintaining it and bringing your friends on board and then the depreciating asset it becomes.

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